Barclays: High-Grade Bonds Don’t Compensate for Liquidity Risks

By Michael Aneiro

Strategists at Barclays are the latest to opine that corporate bonds aren’t adequately compensating investors. In its latest Global Asset Allocator report, Barclays homes in on the investment-grade market, saying that market isn’t paying investors enough in comparison to Treasuries given that it’s far less liquid than the Treasuries market, but it says junk bonds still stand to gain further:

We think recent weeks have supported our underweight allocation to investment grade credit. Our view since last September has been that the additional spread offered by global credit is insufficient to compensate for the lack of liquidity, particularly in the higher quality credits, leading us to favor the high yield segment of the market. Since December 13, yields on US investment grade corporates have been flat, although spreads to Treasuries have fallen 10bp. Within investment grade, our preferred categories – BBB rated and financials – have generally performed in line with the broader aggregate [index].

In comparison, yields on high yield US corporates have fallen 24bp and spreads to Treasuries have fallen 38bp. We continue to see Federal Reserve purchases and extensive prefinancing by many individual names in the asset class as supporting an overweight allocation to the high yield segment, despite limited liquidity.

Barclays also says it maintains its neutral allocation the US mortgage market, given the offsetting influences of rich current valuations for mortgage securities but a solid recovery phase for the housing market that’s approaching the two-year mark. “Our preferred position in this segment is long agency mortgage-backed securities on the basis that rate volatility can move lower,” Barclays writes.